Answers to 5 key questions about the new Tax-Free First Home Savings Account (FHSA)
Marissa Mah, B.Comm., LL.B., LL.M. - Apr 01, 2023
Starting April 1, 2023, the FHSA will be available to Canadians that are interested in taking advantage of the benefits of this unique savings vehicle
The Government of Canada recently announced a new investment account known as the “Tax-Free First Home Savings Account” (“FHSA”). Starting April 1, 2023, the FHSA will be available to Canadians that are interested in taking advantage of the benefits of this unique savings vehicle.
Let’s take a look at the answers to 5 key questions about the FHSA.
1) What is the Tax-Free First Home Savings Account (FHSA)?
The FHSA is one of the Government of Canada’s answers to helping first-time home buyers enter the housing market. Currently, many Canadians – particularly those in the younger generations – are facing historically high barriers to becoming homeowners, due in part to unprecedented increases in real estate prices over the past decade, as well as rising costs of living and inflation following the COVID-19 pandemic. In response to these realities, the Canadian government has started taking action to assist prospective homeowners.
Hence, the purpose of the FHSA is to make it easier for individuals to purchase their first home. It is thought of as a complement to the current “Home Buyer’s Plan", which is still an active program and can be used in addition to the FHSA. There are several important distinctions between the FHSA and programs/savings accounts that have come before it, many of which make it an attractive option for building towards the purchase of a first home.
2) How does the FHSA work?
The structure of the FHSA can be thought of as a hybrid between the existing Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA):
Like both RRSPs and TFSAs, money held within an FHSA can be invested and grown on a tax-free basis. This means that you DO NOT PAY TAXES on any investment earnings within the account.
Like an RRSP, contributions to the FHSA are tax deductible – so not only can you use the account to save money directly, but you can also reduce your tax bill by making such contributions.
Like a TFSA, amounts that are withdrawn from the account are nontaxable – as long as the funds are used towards a qualified home purchase.
Overall, these features mean that you can grow your money without paying tax on the earnings, reduce your tax bill when you add money to the account, and avoid taxes when withdrawing money for a qualified home purchase – the best of both worlds!
Of course, all good things have their limitations. As with both RRSPs and TFSAs, there is a defined limit to how much money you can contribute to the account. Currently, individuals can only deposit up to $8,000 per calendar year into their FHSA, with a maximum total contribution limit of $40,000. Once the FHSA is opened, the account holder begins to accumulate contribution room. Unused contribution room in a given year is carried forward, but you can only use up to $8,000 of unused contribution room each year. In other words, if you have carried forward contribution room from previous years, you can only ever contribute a maximum of $16,000 per year.
If you opened an FHSA in 2023 and only contributed $4,000 that year, you can subsequently contribute $12,000 in 2024 (i.e., $4,000 unused in 2023 + $8,000 for 2024).
However, if you opened an FHSA in 2023, made no contributions in 2023 or 2024, you could only contribute $16,000 ($8,000 unused from 2023 + $8,000 unused from 2024) in 2025, even though you technically have $24,000 of unused contribution room as of 2025.
It is also important to know that you can transfer funds from your RRSP to an FHSA on a tax-free basis, as long as you do not exceed the annual limits outlined above. This is a useful feature because it allows you to use money in your RRSP towards the purchase of your first home, without the drawbacks of the current “Home Buyers Plan” (HBP) mentioned above. With the HBP, qualified RRSP withdrawals that are used to buy a home are required to be repaid into the RRSP within a specific time frame; however, if funds are transferred from your RRSP into an FHSA prior to withdrawing them for your home purchase, no such repayment needs to be made. Using this feature does not restore RRSP contribution room, nor does it generate a new tax-deduction amount.
3) Who is eligible to open a FHSA?
The FHSA is available to Canadians aged 18 and older with a social insurance number (SIN), but only if they have not owned a home in which they have lived in the current or previous four calendar years.
4) What investments can be held in a FHSA?
All of the same qualified investments that can be held within an RRSP or TFSA are eligible for an FHSA. This includes mutual funds, publicly traded securities (e.g., stocks, ETFs), government & corporate bonds, and guaranteed investment certificates (GICs).
5) Are there any other limitations to the FHSA?
Because this account is meant to help people buy their first home, there are defined limitations on how the money can be used on a tax-free basis. As mentioned above, withdrawals from an FHSA are only tax-free if they are applied towards a qualified home purchase. If the money is used for any other purpose, it will be subject to withholding tax AND the amount will be added to your income for personal income tax purposes. Additionally, the contribution room lost from such a withdrawal will not be reinstated (i.e., you lose the contribution room forever).
The FHSA must also be applied to the purchase of a first home within 15 years of the account’s opening, or by the year the holder turns 71, whichever is earlier. Furthermore, once the holder has made a qualifying withdrawal, they are required to close the account and transfer or withdraw the remaining funds by December 31 of the following year. Such remaining funds can be transferred to an RRSP or RRIF without penalty, or be withdrawn and subject to the above taxes.
It is also important to know that you are allowed to hold more than one FHSA, but you cannot exceed the above-mentioned contribution limits (i.e., having more than one account does not change the contribution limits for an individual). Any contributions exceeding those limits will be subject to 1% tax each month until the excess amount is withdrawn or more contribution room becomes available.
Making home ownership slightly easier
While it is certainly not a silver-bullet for solving the problems of the current housing market, the FHSA has clear benefits for those that are eligible. If you want to learn more about how this new opportunity might help you, we would love to talk to you – do not hesitate to reach out to us!